The prospect of a Chinese auto industry growing at insane speed thanks to a booming market and resiliently low wages has long kept auto industry execs up at night, most notably inspiring Sergio Marchionne’s acquisition of Chrysler. But basic economic principles dictate that you can have a high rate of growth or low wages… but not both. Growth inevitably drives inflation, which drives up wages, which in turn slows growth. And according to a report in the Wall Street Journal [sub], that dynamic is already taking hold.

Jae-Man Noh, head of Hyundai’s joint-venture operations in China, said average manufacturing-worker wages in China—about 27,000 yuan ($4,200) a year per worker in 2009—are likely to double by 2015 from current levels.

Auto makers are expected to be affected as much as other industries by the trend, if not more, Mr. Noh said, adding that wage costs for many foreign auto manufacturers already have doubled in less than a decade. He said that a rival foreign auto maker that Hyundai has researched has seen worker wages in China rise to 49,000 yuan a year per worker in 2010, up from 24,500 yuan a year in 2003.

“We need to let go of our perception that the Chinese market is a low-cost production base,” Mr. Noh told a group of reporters at Hyundai’s office in Beijing. He didn’t offer specifics on Hyundai’s wage costs in China.

And though the laws of supply and demand made this development inevitable, the story of the decline of China’s low-wage manufacturing base is a lot more interesting than you might think. After all, economic and historical forces may seem mechanical in the abstract, but on the ground level they work in dramatic, disruptive ways.

Anyone who has spent the last decade or so in China will have witnessed incredible economic growth, but along with it has come a creeping inflation. Despite widespread accusations of currency manipulation, certain commodities like food and real estate have driven prices incredibly high in recent years. This selective inflation was already underway when I visited China in 2007, and according to Frau Schmitto-san, grocery shopping in Beijing has become nearly as expensive as it is in Tokyo. And in another sign of how bad inflation for basic consumer goods has become, China recently opened its “strategic pork reserve” in an effort to keep prices affordable. Another dynamic playing into Chinese inflation: the penetration of economic development and infrastructure into the country’s interior has reduced the wage and opportunity differential between the coast and the interior, reducing supplies of cheap migrant labor.

But the tipping point for the auto industry came last year, when a series of strikes hit Honda and Toyota assembly plants in China as part of a wave labor unrest that has its own Wikipedia entry. Work was halted at Honda and Toyota plants, as well as at key suppliers like Denso and Omron, and production ground to a halt for weeks. Calling the strikes, which were largely triggered by demands for better wages and working conditions, a “wake up call for Japan,” the NY Times reported

Japanese companies see the Chinese as crucial consumers of their goods to make up for a shrinking and aging market at home. Some of the most profitable Japanese companies, like Fast Retailing, which runs the budget clothing line Uniqlo, have relied on production in China since the 1990s to keep prices low.

“Japan is starting to realize that the age of cheap wages in China is coming to an end, and companies that looked to China only for lower costs need to change course,” said Tomoo Marukawa, a specialist on the Chinese economy at Tokyo University.

And make no mistake, foreign firms clearly have more to lose from newly-empowered workers, as the BBC reported

The BBC’s China editor Shirong Chen says the government has tolerated strikes at foreign-owned plants, which are obliged to respect workers’ rights, but maintains strict control at Chinese-owned factories for fear of widespread social unrest.

But for foreign firms, the protest must have seemed like “widespread unrest.” As LaborNotes documents, in an in-depth study of the strike wave

the events at Honda Nanhai triggered a chain reaction among workers in auto supply and electronics factories throughout the Pearl River Delta. According to the Guangzhou Federation of Trade Unions, more than 100 strikes occurred, of which only a small number were reported in the media. Around Toyota’s ultramodern factory in Guangzhou Nansha, eight of 14 core suppliers had labor conflicts. And action spread to other areas: workers in several electronics factories near Shanghai and at a Toyota supplier in Tianjin struck for several days.

The strike movement not only scared multinational corporations in China, it challenged the system of labor control. Typically, tacit coalitions between capitalists and local government rule over conditions inside the factories. Unions play a role in former state-owned enterprises and flagship joint ventures, but not in most private companies. Often, local governments back up violations of labor law by major investors, as has been documented in many cases for suppliers to multinationals such as Wal-Mart, Apple, and Nike.

But under conditions of rapid growth and highly modern production, the methods of control have become ineffective. Hundreds of labor conflicts occurred in the wake of the global economic crisis, affecting millions of Chinese workers in 2008 and 2009. Following the recovery, workers are seeking a voice. Workers’ wages have been falling continuously as a share of China’s national income since the 1990s, when the shift toward capitalism really took off, and the government is now officially calling for higher wages in order to raise domestic demand.

If underlying economic fundamentals have been pushing China towards wage inflation for some time, the dam broke in last summer’s wave of strikes. Now Hyundai is publicly acknowledging the reality that every foreign auto firm must face: low costs alone aren’t reason enough to be in China. But as the WSJ notes, even though the glory days of cheap Chinese labor may be over, Hyundai (and others) still have plenty of incentive to stick with their Chinese market plans.

China still offers other draws, including strong economic growth, an increasingly affluent population and a quickly growing car culture.

Plus, Hyundai’s average factory labor cost in China is still one-fifth of that in South Korea, Mr. Noh said. What concerns him most is the dramatic rate of increase, he said.

This trend is “inevitable” as the Chinese economy grows and society improves, Mr. Noh said.

Despite rising labor costs, China’s auto exports will continue to increase in part because of excess auto-production capacity in the country, he said. China’s central government will also continue to focus on automotive exports, he said.

The growth of the Chinese car market in recent years has been nothing short of freakish, and was overdue for this kind of correction. But even though costs are increasing, China’s continued growth and still-low costs relative to other manufacturing centers continue to make it an attractive target. Foreign firms just have to work a little harder than they used to, and as Chinese wages rise, workers there and around the world will only benefit from a narrowing assembly cost gap.

Even if all Chinese become rich, there will still be cheap labors from Vietnam or even Africa.

There isn’t really a way out for American manufacturing workers. They either need to improve their capability/efficiency or accept lower wages. Paying $60k for screwing components onto a car is ridiculous. Even as of today, you can find better skilled and better motivated Chinese worker willing to screw that same component for less than $10k per year.

“…accept lower wages…”
If you are a worker in a given country and you can’t run away for obvious reasons you have to cope with a defined cost structure that you can’t avoid, even by living frugal.
Tell your landlord, for example, that he needs to “accept lower rents”. Tell your insurance company that they will have to “accept lower premiums”, etc.
In other words, standard cost of living determines wages in a given community, or at least they should. Otherwise, there will be unwanted side effects.

telling your landlord to accept lower rents works like a charm, unless your landlord can either

a) keep getting subsidized loans for his property from banks subsidized by the central bank / government, allowing him to win any war of attrition against renters.

b) Rent for more to unproductive welfare recipients. Not the destitute kind just barely scraping by, but the ones ensconced in some public union, whose only contribution is to the campaign war chests of those that rob on their behalf.

If the landlord in addition can convince some corruptocracy that zoning laws preventing anyone else from building competing space……., well, then I guess it’s cardboard and dumpster time for those forced to live off their own actual productivity.

Corollarily, if you take these abilities away from landlords, cheap housing in utter abundance for virtually everyone will be the inevitable result. But the land owning classes are big campaign contributors too, so fat chance of that happening.

Korea got expensive after the 88 olympics, a lot of textile work went overseas first, followed i the 90’s by tech work. Japan and Korea outsourced long ago, India is rapidly getting expensive and China will soon follow, despite the government’s attempts to keep wages low. They have less control than they think.

Sub Saharan Africa is the next cheap labor location, provided the political situation stabilizes. Certain jobs are not coming back, and it’s debatable that they should.

Expensive??? Chinese autoworker wages are only expensive relative to other Chinese wages. There is no way we can oompete with China on wages now or 20 years from now. If westeren governments don’t wake up soon none of them will have any manufacturing in their countries. If you don’t have a manufacturing base you don’t have a middle class which means you don’t have a tax base. Ask Flint or any of the many towns that have lost their factories, and with them their middle class, how things are now. We desperately need to apply a quid-pro-quo on manufactured goods from BRICK. If they want to sell to us then they have to buy from us. Opps sorry I forgot, our governments are the best money can buy and BRICK and Wall Street lobbyists won’t allow anything to cut into their masters wallets.

Fortunes have been made existing on cheap labor, not only in America but Canada and Mexico as well. So what if the cheap labor happens to be somewhere else now?

Without that cheap labor many of us wouldn’t be able to afford things like HDTVs, iPhones and iPads, and the gamut of toys that would cost an arm and a leg if it was union-made in America.

I have to live my life in Wal-Mart fashion and the stuff I buy is not fancy or high-cost, but, hey, at least I’ve got it. Without China’s cheap labor I would not be able to afford it.

If China’s cheap labor turns out to be a thing of the past, there are plenty of developing countries to take China’s place. How about India, Pakistan, Bangladesh, Indonesia, Thailand, The Philippines, Viet Nam… just to name a few.

The vast majority of the manufacturing cost of “things like HDTVs, iPhones and iPads” is material cost; there is very little direct labour. If I had to guess, I would say the cost breakdown is something like this:
85% parts
5% labour
5% overhead
5% logistics cost

If you shrink labour costs by building in a cost to market region you typically increase logistics cost somewhat.

Bottom line is these gadgets might be a bit cheaper when built offshore, you could still afford them.

Also the price is set by what consumers are willing to pay, not by the cost to produce a product. So if my iPad was built in North America at ~slightly~ higher cost it is more likely that Apple’s margins might get squeezed a bit but the selling price at the Apple store would likely be more or less the same.

Low level manufacturing has been relegated to a “developing” world industry. People need to get over it. We have two choices:

– transition away from our dependency on low level manufacturing as a career choice
– bring back low level manufacturing and accept the real cost of goods

The talk of “bringing jobs back” arbitrarily with no concessions for the effect on the prices of goods, ESPECIALLY in the midst of the longest recession EVER, is ASININE. We have backed ourselves into this corner, and blaming the Chinese for our short sightedness, laziness and appetite for unrealistically cheap goods will get us nowhere.

>>”Despite widespread accusations of currency manipulation, certain commodities like food and real estate have driven prices incredibly high in recent years. ”

Actually, its exactly because currency ‘manipulation’ that there is massive inflation in the Chinese economy. Simply, to keep pace with the falling dollar, the yuan needed to be devalued relative to its floating peg. More yuan, more inflation.

This mass inflation is not happening just in China, but also S. Korea, Vietnam, Thailand, and Brazil. Essentially all countries that have participated in competitive devaluation of their currency.

But the “manipulation’ bit is wrong. As the Chinese have frequently accused, the ‘currency manipulation’ sin can also be applied to the US. So any accusation of currency ‘manipulation’ is a bit hypocritical on all parities.

I expect that growth in China will be driven less by exports and more by domestic consumption – there are signs this is already happening.

The only reason to build in China is low cost; most people in the first world view a “made in China” badge as a negative, or at best, neutral. Few people would pay extra for a product because it was made in China.

As I have pointed out previously, China has yet to develop any desirable international brands – they are still stuck at the bottom of the value chain, as a low cost producer of other people’s stuff.

I expect that low cost regions next to major markets will get another kick at the can – Mexico for North America, Eastern Europe for the EU. Ten years ago, production lines in places like Mexico were moving to China – I expect that trend to reverse, especially for bulky items where increased shipping costs are significant. Even though it is quite cheap to ship goods by sea, there is a cost associated with having a container full of widgets stuck on a slow boat from China.

My Adidas shoes are made in Vietnam. The Samsung phone I bought recently has also everything made there except for the battery which says Made in Korea Finished in Vietnam (whatever the heck that means.) Our Samsung cheapo washing machine and refrigerator came from Thailand. And for the love of God, don’t buy kitchen appliances from Samsung! You’ll regret it. Stick to their AV and IT products.

One of my fave quotes from the internets: For America to compete with 3rd world countries, it has to become one.